The EU Taxonomy on sustainable economic activities – challenges deriving from the reference to the EU Taxonomy in different legislative and political contexts and it implications for energy efficiency investments

Panel: 3. Policy, finance and governance

Author:
Bettina Dorendorf, KfW Bankengruppe, Germany

Abstract

The establishment of the EU Taxonomy is a core component of the EU Action Plan on Financing Sustainable Growth dated March 2018.

The classification system seeks to provide specific conditions under which an economic activity can be classified as ecologically sustainable.

The Taxonomy Regulation (in force since 12 July 2020 (EU 2020/852), is followed by two main EU COM Delegated Acts (“DA”) in 2021 to determine the details of the technical screening criteria to be applied for six environmental objectives.

The initial intention was to provide transparency for investors as regards the degree of sustainability of investment products and by this contribute to preventing “green washing”.

Despite the work in progress nature of the EU Taxonomy, it is already an important point of reference in an increasing number of important legislative and political contexts, having a major impact on business models and investments, including in energy efficiency.

1. New reporting obligations directly established in the Taxonomy Regulation

Disclosing the degree of alignment with EU Taxonomy criteria:

(1) Providers of investment products in particular when marketing products as “green” or “sustainable”: amendment of the Disclosure Regulation (EU 2019/2088)

(2) (Large) Entities/Companies with reporting obligations under the Non-Financial Reporting Directive (2014/95 EU). The ongoing review (new Corporate Sustainable Reporting Directive, CSDR) likely expands the scope of reporting obligations.

2. Further direct links to EU Taxonomy

(a) EU Green Bond Standard (EU GB): The issuance under the new standard requires alignment with the criteria of the EU Taxonomy (EU GB framework expected in June 2021).

(b) Eco Label for retail financial products, part of the EU Action Plan: the label requires a percentage of EU Taxonomy compliant assets. The use of the DNSH criteria (exclusion list or full compliance) is under discussion (Directive expected in 2021).

(c) InvestEU (MFF 2021-2027) is combining different European financial support instruments under one roof. Investments financed its support must undergo a “sustainability proofing mechanism” with explicit reference to the EU Taxonomy criteria.

(d) Next GenerationEU is the EUR 750 bn anti-corona financial support with the center piece Recovery and Resilience Facility (RRF). 37% of the funds must contribute to sustainable transition. The EU marker tracking system used to check compliance with this objective aims to use many elements of the EU Taxonomy. Also, for each investment measure a DNSH assessment must be conducted.

(e) Next Generation EU Green Bonds: The EU COM will refinance 30% of the NextGeneration EU through the issuance of Green Bonds, taking into account the future EU Green Bond Standard to the extent possible. The reference to the EU GB standard creates a direct link to the EU Taxonomy criteria.

(f) Also, the EC plans to publish the revised Sustainable Finance Strategy in middle of 2021, which will contain numerous references to the EU Taxonomy.

Relevance for energy efficiency investments and conclusion:

The EU Taxonomy for ecologically sustainable economic activities with its mostly science based technical criteria is becoming a cross sectoral benchmark for sustainable investments.

The EU Taxonomy is still unfinished and many operational questions are to be solved.

A high degree of compliance with its criteria however will help getting access to European Funds and open new finance options in the green bond market.

Energy efficiency investors should prepare for the challenging and comprehensive data and information requirements resulting from the EU Taxonomy and its use in different contexts to their companies and finance providers.

Doing so will help them benefit from future beneficial finance options and conditions.

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